Produced and hosted by Naomi Fowler of the Tax Justice Network
This is what I can’t tolerate anymore, the lies by these people that all day long are talking about free speech and the fight against corruption. This cannot continue. Every story we are looking at now today in the Arab world will have a connection to one of those safe havens, and God knows how can you find the real owners if every jurisdiction says, sorry, we can’t give out any data, helping people that should be exposed. You know, your country and US and all these offshores are providing all the secrecy and the ability to shield the beneficial ownerships and the structures of these companies.”
~ Rana Sabbagh, OCCRP, the Organised Crime and Corruption Reporting Project and founder of the Arab Reporters for Investigative Journalism
It is not okay anymore in 2020 to own a business, to own a ship that you have deliberately hidden the ownership of through hugely complicated structures to either avoid tax or minimise your tax liability or reduce your safety standards.”
~ Thom Townsend, Open Ownership
Joe Biden and his team must address the colossal power of the corporate world, which after decades of mergers and acquisitions has become super concentrated into the hands of monopoly corporations in virtually all sectors…it ranks alongside all the other huge priorities facing the incoming administration, including climate crisis and tackling inequality and restoring trust in democracy.”
~ John Christensen, Tax Justice Network
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Further Reading:
A Hidden Tycoon, African Explosives, and a Loan from a Notorious Bank: Questionable Connections Surround Beirut Explosion Shipment, OCCRP coverage
Beirut blast: a night of horror, captured by its victims
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Despite numerous data challenges, economists have established that the multinational corporations’ reported profits are not well aligned with their economic activity across countries. However, uncertainties remain about the extent and patterns of this misalignment. In our recently published research article with Petr Janský, we analyse data on German-based multinational corporations and their foreign affiliates collected by the Deutsche Bundesbank. We find that the world’s tax havens attract a considerably higher share of German multinational corporations’ profit than economic activity, while in Eastern European countries, most developing countries and some big European countries reported profits are much lower than economic activity would suggest.
How do we measure corporate profit misalignment?
The term ‘misaligned profit’ describes the share of profits reported in a country that is not in line with the share of economic activity reported in the respective country. We compute each country’s share in the total profits of the sample and compare it to each country’s share in total economic activity measured in terms of number of employees, tangible and intangible assets, and turnover. We also use a measure of activity (‘CCCTB’) which is weighted one-third tangible and intangible assets, one third turnover and one-third number of employees. This is similar to the formula proposed by the European Commission for the Common Consolidated Corporate Tax Base (CCCTB). However, due to data limitations our CCCTB measure does not exactly correspond to the European Commission’s proposal. For example, we cannot split the factor ‘employees’ between remuneration costs and number of employees and we cannot distinguish between tangible and intangible assets in our data.
If actual profits are higher than what would be estimated based on the share of economic activity, this gives rise to ‘excess’ profit. If actual profits are lower than what would be estimated based on economic activity, this gives rise to ‘missing profit’. In order to measure the overall scale of misalignment, we compute how much profit is in the ‘wrong’ place by adding up the “excess profit” of jurisdictions where there is no concomitant economic activity.
For our analysis, we use data collected by the Deutsche Bundesbank, which include confidential data on foreign direct investments from the Microdatabase Direct Investment (MiDi) and a combination of confidential and publicly available balance sheet data from the JANIS database. Our main sample includes on average 1236 German parent companies per year with 5047 foreign affiliates in 178 jurisdictions for the years 1999-2016. About 60 per cent of observations stem from the manufacturing sector, and about 30 per centfrom the service industries.
How large is the misalignment of reported profits and economic activity in total and by country?
Figure 1 depicts the share of global profits that would need to be reported in other jurisdictions in order to be aligned with economic activity on average for the years 1999-2004, 2005-2010, and 2011-2016.
We find that the scale of misalignment varies depending on the factor that we use to proxy economic activity. Global profit misalignment has risen when measured in terms of assets and turnover but not in terms of employees. When we look at the yellow column which combines of all three factors, we see no clear trend of the scale of misalignment. It has rather remained stable over time at about 10 to 13 per cent of total reported profits.
When we look at the distribution of misalignment across countries, our results are broadly in line with the literature: High-tax countries and most developing countries are missing-profit countries, while the world’s tax havens attract a considerably higher share of profits than economic activity. The Netherlands are the most notable example with about 80 per cent of reported profits being misaligned with economic activity, closely followed by the other tax havens which had to be grouped together due to the confidentiality requirements. Interestingly, the remaining EU tax havens are still more important for German MNCs than the rest of the world’s tax havens. The other excess-profit countries are mostly resource-rich countries from the Middle East, Australia and Argentina. The classification of China as an excess-profit country is puzzling. It might be explained by the exceptional combination of low cost of labour and capital combined with increasingly high value-added activities which we cannot control for in our approach. Another surprising result is the classification of all Eastern European countries as missing-profit countries despite their very low corporate tax rates.
Our results do not allow for a clear classification of Germany as an excess or missing-profit country. This is because the relative weight of misalignment is relatively low (only 2 per cent of total gross profits according to figure 2) and outcomes are not consistent over time, differ by activity factor and by the tax rate measure we use in order to compute the pre-tax profits. This is surprising as many studies find that multinational corporations shift profits out of Germany which would be consistent with Germany being a missing-profit country. However, note that we explicitly analyse a sample of German parent companies which does not include the German-based affiliates of foreign mutlinationals. Our results might thus be in line with a headquarter bias in profit shifting, in the sense that parent companies rather shift profits in between affiliates in order to minimize their global tax payments but do not necessarily shift profits out of headquarters or do so to a lesser extent. This would be in line with the results by other researchers who find that European multinational corporations are reluctant to shift profits away from their headquarters.
Our data suffers from several limitations. There is a lack of data on pre-tax profits and compensation of employees of foreign affiliates. As mentioned before, we are not able to distinguish between tangible and intangible assets which probably leads to an underestimation of misalignment. Further, our sample might not be representative of the whole population of German-based MNCs. Still, we think that – in the absence of representative data on MNCs and in particular on domestic MNCs – researchers can combine information from different pieces of data as a second best.
Conclusion
We analyse a sample of German-based parent companies and their foreign affiliates and find that about 10 to 13 per cent of reported profits are misaligned with economic activity. The distribution of „missing“ and „excess“ profits follows typical patterns: We find greater profits than activity reported in tax havens, and less profits than activity in developing countries, big high-tax countries and in all Eastern European countries despite their very low tax rates. Our results do not provide an indication of excessive profit shifing from German-based parent companies to their foreign affiliates but would be consistent with significant profit shifting activities between affiliates. This might indicate that foreign affiliates are more relevant in multinationals‘ strategies of tax minimisation. Due to our descriptive approach, we are not able to attribute the observed extent of misalignment to particular reasons. Profit shifting is only one of several possible explanations. Still, the outstanding role of the world’s tax havens in our sample points in this direction and thus requires further explanation.
The Transnational Institute has just published a report setting out ten proposals to mobilise resources to cover the cost of the global COVID-19 pandemic and to pay for the transition away from the fossil fuel economy. As the report points out in its conclusion, the multiple crises facing both the global North and the global South have shifted the Overton window of what is economically feasible. And as the report also makes clear, the means for building back better are readily available provided governments are prepared to take bold measures to, for example, tax wealth and corporate profits, reform fossil fuel subsidies, tax carbon, cancel debt, and achieve the UN sustainable development goals.
On the expenditure side the report identifies six priority areas of what might, in the words of economist Jayati Ghosh, shape “a global multicoloured new deal: red, green and purple.” These expenditures are summarised as follows:
To resource these expenditures TNI identifies ten proposals, most if not all of which will be familiar to readers of this blog, including a global wealth tax; a tax on income from wealth held through offshore structures; an excess profits tax; reforming corporate income tax; a financial transactions tax; removing fossil fuel subsidies, and so on. As the diagram below suggests, the potential revenues from these proposals are more than sufficient to pay for the expenditures identified above:
The core message of this report is that the gravity of the multiple crises facing humanity requires entirely new economic, political and cultural models that place care for humans, and for planetary life, above the pursuit of profit. If we are to meet the challenge of building back better, the resources to achieve this better future are to hand – “so long as the rich and powerful are made to pay”.
This new paper describes why beneficial ownership regulations shouldn’t exempt companies listed on a stock exchange. Securities’ disclosure regulations are not adequate for identifying beneficial owners. In addition, definitions are subject to loopholes that affect identifying all relevant end-investors.
As assessed by the Tax Justice Network’s Financial Secrecy Index and summarised by our paper on the 2020 State of Play of Beneficial Ownership Registration, more than 81 jurisdictions have approved laws requiring beneficial ownership to be registered with a government authority. However, many legal frameworks (including the EU Anti-Money Laundering Directive) exempt listed companies from the scope of beneficial ownership registration, based on what we consider to be a wrong interpretation of the Financial Action Task Force recommendations.
The exemption benefitting listed companies is usually based on the fact that some other regulator, eg the securities or financial regulator or the stock exchange, is supposed to already have that information. However, this brief looks at securities regulations available in some countries, eg the US and the UK, showing that securities regulation doesn’t necessarily cover beneficial ownership information.
In the case of the US, the Securities Exchange Commission (SEC) has form 13D which is even called “beneficial ownership report”. However, it doesn’t necessarily refer to a natural person (which is the key element of the beneficial ownership concept according to the Financial Action Task Force and the OECD’s Global Forum).
Other countries, eg Ecuador, India and the Philippines do cover natural persons when requiring listed companies to identify their beneficial owners. Nevertheless, thresholds are too high to be able to identify all relevant investors.
This brief explains why we need a comprehensive approach to beneficial ownership registration to ensure that all legal vehicles, including those involved in passive investments, are subject to proper transparency. The brief also proposes measures to address the challenges, including our previous paper on the secrecy that surrounds listed companies and investment funds.
The United States has long relied on informal agreements with private sector institutions to assert its interests in the global financial system. If we are to fight kleptocracy, we need to make this privately run plumbing more accountable to international institutions, argues Edoardo Saravallein this blog reproduced from a recent edition of Tax Justice Focus.
Getting a Grip on Global Financial Infrastructure
Edoardo Saravalle
When President Trump defied the international community and left the Iran nuclear deal in 2018, he had an unlikely partner: the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The Belgian SWIFT provides the payments-messaging services that, in the words of Federal Reserve Chairman Ben Bernanke, are ‘part of almost every international money transfer.’[1] So when SWIFT decided to ban certain Iranian banks from its services—over the protests of European governments—it packed a major punch to Tehran’s economy.
Today, privately-controlled financial nodes like SWIFT are regular partners of U.S. foreign policy. This may soon change. As Washington focuses more on transnational economic threats like kleptocracy and tax evasion, infrastructure providers may consider their economic self-interest before eagerly cooperating. Public-private partnerships are a shaky foundation for U.S. foreign policy, and the United States should not let private actors control the plumbing of the international economy. Instead, it should seek global cooperation to create a better system.
SWIFT is just one of the services that make up the international economy’s plumbing. To make metals trading easier, there is the London Metal Exchange (LME) that enables futures trading and licenses warehouses around the world. To ensure the smooth payment and tracking of securities, there are Clearstream and Euroclear. To make investing in emerging markets easier, J.P. Morgan created the Emerging Market Bond Index which brings together securities across a wide swath of countries. And the London Inter-bank Offering Rate (LIBOR), a changing interest rate based on a survey of bank employees, is calculated to ensure adjustable interest rates that mirror market conditions.
These ‘infrastructures’ started as ways to make commerce easier, then became central to the functioning of global finance, and now are key components of U.S. power. The SWIFT threat is one of the strongest weapons in the U.S. economic arsenal. Even major players like Russia and China have come to fear a cut-off. But SWIFT is not alone. The LME magnified the effect of U.S. sanctions against Russian aluminum producer Rusal by suspending the company from its exchanges. Clearstream has blocked Iranian and Russian assets, and J.P. Morgan zeroed out Venezuela in its bond index, restricting capital flows to the country.
While these infrastructures do promote U.S. foreign policy, they further a limited vision of it: one where Washington enforces norms and goals against specific countries. But U.S. foreign policy is changing. During his campaign, Vice President Biden has promised a ‘foreign policy for the middle class,’[2] one that unites foreign and domestic goals, that combines economic and security goals, and that targets tax havens and corruption as ‘drivers of inequality.’[3] This would mean taking on a world where 8 percent of global household wealth hides in tax havens.
International financial infrastructures should be great partners in tackling these transnational problems. What better way to monitor and check international flows of money between shady jurisdictions than networks like SWIFT or ClearStream that make these flows possible? The NGO Tax Justice Network has called for ‘SWIFT statistics for all’ to track financial flows and tax evasion, and Georgetown Professor Stefan Eich has argued SWIFT contains an ‘an untapped utopian promise’ of ‘global monetary and financial regulation’ due to the fact that all financial transactions need to flow through it.[4]
However, past cracks in U.S. cooperation with infrastructures suggest that leveraging these privately-controlled choke points might not be so easy. First, these nodes did not help Washington out of altruism. It took years of fines and enforcement by the United States to ensure cooperation. Clearstream paid $152 million in fines over allegations that it held $2.8 billion in securities for the Central Bank of Iran. The board of SWIFT is made up of representatives for the world’s largest financial institutions, so it faced two layers of threats: enforcement against the board-member banks and against the company itself. This danger presented itself in 2018, when Iran hawks outlined the option of sanctioning member banks if SWIFT did not ban the Iranian banks.
Even more pressure will be necessary in the future. Faced with these legal costs and compliance headaches, the infrastructures limited their risk by cutting off Iran. The countries that enable tax evasion, though, are far more plugged into the global financial system. It will be harder for enforcement actions to convince infrastructures to cut off or pressure these countries or banks. Prosecutors’ nerve may fail before taking on major European jurisdictions, and U.S. policymakers may choose transatlantic conciliation over more friction regarding tax enforcement. Plus, it will be harder to count on the self-interest of the private sector: their financial interests will be far more at stake with tax havens compared to Iran.
Furthermore, successful coercion by the U.S. might not ensure consistent cooperation from these infrastructures. In the past, they have gone along with U.S. requests while also furthering other competing agendas. British banking giant HSBC has frozen the account of a Hong Kong pro-democracy activist and has come under fire, along with British bank Standard Chartered, for backing the region’s controversial national security law. These banks have acted even as U.S. sanctions forced financial services firms to cut ties with pro-mainland Hong Kong government figures.
In one extreme case these infrastructures enabled non-state actors to assert themselves over sovereign governments. Bond servicing infrastructures enabled hedge funds to enforce their will over the government of Argentina. Facing a court order, Buenos Aires discovered that it could not pay all other bondholders through the traditional payment infrastructures as long as it refused to pay the hedge funds.
Privately-controlled infrastructures’ cooperation with competing agendas could harm U.S. anti-kleptocracy and anti-evasion goals. Countries that currently benefit from tax evasion and the unfair financial architecture of the global economy, whether by offering exceedingly low tax rates or allowing owners of ill-gotten wealth to shield their identities, would fight these U.S. measures and try to sway the infrastructure providers. In the past, countries have protested, refused to cooperate, and (often rightly so) complained about U.S. hypocrisy. In 2014, the United Kingdom opposed Russia sanctions that would have harmed its financial sector and spearheaded efforts to build a relationship with Chinese finance. Still, in most of these cases, U.S. threats have convinced recalcitrant countries.
A transnational anti-evasion and anti-kleptocracy campaign would run into a new problem as well. The success of such an effort would depend on its ability to sway the private sector—giving added influence to the same entities it is trying to coerce. While a SWIFT board member or a securities processor is agnostic about Iran policy, as long as it does not have economic interests in play, it will have strong thoughts about continuing to serve the world’s wealthiest citizens—and in keeping its own tax rate low. This will make it more appealing for these infrastructures to form coalitions with like-minded countries bent on protecting their privileges in today’s unfair global financial system.
Finally, these privately-run infrastructures can be outright corrupt, so even if they were to cooperate they would be unsteady partners. The LIBOR scandal makes this danger clearest. The LIBOR is a number that is central to the functioning of global credit markets. Lenders adjust the rates they offer borrowers based on LIBOR. According to the New York Federal Reserve Board, there are about $1.3 trillion in consumer loans and $5.2 trillion in corporate loans and bonds based on LIBOR.[5] The number, soon to be shelved in light of its legal problems, shifts daily based on surveys of bankers. Following a major investigation, the U.S. Department of Justice and the U.S. Commodity Futures Trading Commission found that traders were cooperating to game these surveys. They would adjust their responses in order to make money on their positions. In the process, they shaped the cost of borrowing for borrowers all over the world. The LIBOR case highlights the underlying peculiarity of the infrastructures: though they are faceless and globally influential, they are usually made up of just a few players who can tilt the playing field. The incentive to tilt the field toward the private sector would be even more pronounced in this new foreign policy context.
Washington should not fight kleptocracy and tax evasion on such an unstable foundation. It should not rely on private partners that require constant coercion, that work with countries and private interests with competing agendas, and that allow corruption. Instead, Washington should ensure supranational control of these infrastructures so that they respond to the goals and wishes of the international community.
Turning the infrastructures of global finance into international organizations will have its costs. Today, sanctions often allow Washington to gets what it wants quickly and unilaterally, avoiding the diplomatic headaches that come with multi-lateral decision making. And indeed, making bond-servicing or payment processing plumbing the joint responsibility of international governments might entail more of the gridlock and international squabbling associated with the United Nations and other international organizations.
Still, this would be a far-sighted plan for the United States. States should not delegate key nodes of the global economy to private actors with their own agendas, particularly as they undermine states’ goals. As the undercutting of pro-democracy activists in Hong Kong suggests, private organizations can be untrustworthy partners. As the power-politics of the global financial system evolve, the United States might lose its uncontested influence as infrastructures hedge their bets by appeasing other countries. International control would therefore bring realpolitik as well as moral benefits.
As long as states are in charge, Washington will have a seat at the table. From this seat, it will be able to carry out a far-reaching and innovative foreign policy aimed at righting an unfair financial system. Internationally-controlled financial infrastructures will ensure that it is public goals, not private interests, that set the agenda.
Edoardo Saravalle is a former researcher at the Center for a New American Security. This article was first published in The American Interest on September 4, 2020.
[1] ‘Highlights: Bernanke’s Q&A testimony to House panel’, Reuters, February 29, 2012
[2] Joseph Biden, ‘Why America Must Lead Again’, Foreign Affairs, March/April 2020
[3] Jake Sullivan, ‘What Donald Trump and Dick Cheney Got Wrong About America’, The Atlantic, January/February 2019
[4] Stefan Eich, ‘SWIFT: A Modest Proposal’, The Nation, October 17, 2018
[5] ‘Second Report: The Alternative Reference Rates Committee’, Federal Reserve Bank of New York, March, 2018
The FinCen files leak disclosed information on “suspicious transaction reports” filed by banks between 2000 and 2017 to the US Financial Intelligence Unit (“FinCen”) in charge of monitoring anti-money laundering.
Although a lot could be said about this leak, there are many outrageous highlights: the leak refers to transactions of $2 trillion (twelve zeros: $2,000,000,000,000). Some banks kept on processing transactions on an account despite several red flags. And the worst part is it appears that both banks and regulators consider that to comply with the law and prevent risky transactions it’s enough just to file suspicious transaction reports, regardless of their quality or timing. That’s like saying that a company is complying with regulations on beneficial ownership registration even if they registered “Mickey Mouse” as the beneficial owner.
But no one is surprised. As described by anti-corruption campaigner Anthea Lawson:
If banks are sometimes complying, and many times only formally “complying” (by filing low-quality or outdated suspicious transaction reports), but money laundering schemes keep popping up (Azerbaijani Laundromat, Moldova Laundromat, Danske Bank, etc.), it’s quite clear that money laundering isn’t being prevented (and even when it’s discovered, it’s very hard to recover any of the money). It’s clear that the system is part of the problem. David Lewis, the Executive Secretary of the main international body in charge of anti-money laundering regulation, the Financial Action Task Force (FATF), confirms this. As reported by the International Consortium of Investigative Journalists (ICIJ):
Although most countries now have dedicated laws and regulations to combat money laundering, Lewis said: “they are rarely being used effectively, or to the extent that we would expect….
‘I would sum up the results as ‘everyone is doing badly, but some are doing less badly than others,’ Lewis said…
Lewis said many countries had only shown a last-minute commitment to tackling money laundering because they faced an upcoming FATF evaluation. “You see a sudden uptick in money laundering investigations and activity as they prepare to compensate for [past inaction], or to tell a good story to the assessors,” he explained.
As Lewis suggests, part of the problem may be on enforcing current laws.
However, ensuring governments properly resource authorities tackling financial crimes, given countries’ lack of interest or their need to face with multiple challenges, including urgent matters (eg Covid-19), is a long shot. The question is how serious governments really are about tackling corruption and money laundering, as the Hudson Institute and Kleptocracy Initiative’s Nate Sibley tweeted:
Before dunking on FinCEN, remember the tiny agency tasked—effectively—with policing the integrity of the global financial system has an annual budget of just $120 million. That’s less than the US government accidentally sends in benefits to dead federal employees each year.”
This blog post has some ideas on what we think should happen to improve the system without merely hoping that current laws will one day be enforced. Of course, part of the problem would be solved if banks and other enablers directly involved with customers and their money were to do a proper job. This would require going beyond asking customers for information and just believing everything they say. After all, a lawyer from Cyprus may (legally) be the beneficial owner of an entity that opened a bank account, but that doesn’t explain the source of the funds, let alone why millions of dollars are being channelled through that account. Banks are already required to apply enhanced due diligence and other measures if they have suspicions, so this is a matter of enforcement.
This blog post proposes new objective measures that would help different players obtain information while discouraging illegal schemes. To put this in perspective, a regulation could say “check that the customer isn’t lying”. While this is a matter of effort and enforcement, our proposed measures neither contradict nor modify that main goal, but try to impose new provisions – for example – “ask for a copy of their ID” which may be easier to enforce or at least to monitor, than the rather general goal of ‘detecting lies’.
First, countries should apply these things, which we’ve been calling for for years:
A: Availability of relevant ownership data
Beneficial ownership of account holders: Banks should not be allowed to open accounts, hold them or do any transaction if they haven’t determined the beneficial owner of the account holder (beyond doubt). Ideally, determining the beneficial owner of an account should go beyond asking for corporate information proving that ‘John’ is the beneficial owner because he is the shareholder of Company A, which opened the bank account. Banks should try to determine whether John is really benefitting, controlling and able to justify the source of funds and the movement of money through that account.
SWIFT messages with beneficial ownership data. The SWIFT messaging standard used to communicate international bank transfers among banks should be upgraded to require data on the beneficial owner of the sender and recipient account to be included in the SWIFT message, to enable the sending bank, the recipient and any intermediary (eg correspondent bank) to run proper customer due diligence checks. We have written more on this in this blog post. Alternatively, until SWIFT upgrades its standard to add beneficial ownership data, correspondent banks should require beneficial ownership data from any sending and recipient bank before they allow a transaction to take place.
Just as the US obliged SWIFT to hand in information for anti-terrorism purposes, the US and the EU should now require SWIFT to upgrade the standard to include beneficial ownership data. As discussed in point 9 below, the US and the EU could also require all local banks which are members of SWIFT to request that SWIFT upgrades the standard in this way.
3. Public beneficial ownership registries: Governments should make beneficial ownership information publicly available in open data format for all types of legal vehicles, including trusts, so that banks all over the world may cross-check the beneficial ownership information declared by their customers.
5. Involvement of banks in verifying registered beneficial ownership data: Banks (and enablers in general) should report discrepancies between the information declared by their customers and the information contained in beneficial ownership registries, as already required under the EU Anti-Money Laundering Directive.
6. Banks detecting discrepancies amongst each other: In addition to banks reporting discrepancies to the beneficial ownership register, they should be able to exchange customer information in a confidential way so they can detect cases where the same customer has given inconsistent information to two different banks. The UK’s financial intelligence unit (FCA) has been working on pilots for this purpose. If mismatches are detected and persist beyond mere simple errors, authorities should automatically be required to investigate.
7. Beneficial ownership registries as sources of compliant customers: Beneficial ownership registries should warn users about any legal vehicle (eg company, trust) with redflags, for example if a vehicle failed to register or update information, if its information doesn’t match other government databases, or if discrepancies have been reported. Banks shouldn’t be allowed to operate (open an account or do a transaction) with any entity marked with a redflag warning on the beneficial ownership register. We described how this could work in the Annex of our paper on beneficial ownership verification.
C: The specific role of bank
8. Systematic analysis to detect money laundering: As presented by Howard Cooper and Chris Ives from Kroll, banks should do much more than just ask information from each customer and analyse transactions on an isolated basis. Instead, they should analyse their full customer base to detect cases of connections between apparently unrelated customers. For instance, customers who share the same legal owners, beneficial owners, director, power of attorney, addresses, IP address, or whose transactions are highly related (either because they mirror each other or because transactions only take place among the same accounts). This has been described further here.
9. SWIFT as a source or centralisation of global anti-money laundering detection: While banks should do more systematic analyses of their customer base and transactions (see point above), this will only detect transactions involving each particular bank. However, money laundering schemes may involve many banks from many countries. For this reason, we have proposed that SWIFT, which already provides money-laundering services to some banks, should help detect or red-flag global money laundering schemes. Alternatively, if SWIFT is unable or unwilling to do this, governments should oblige SWIFT to hand over raw data for the Central Banks or financial intelligence units to conduct those checks, just as SWIFT provides transaction data to the US for the detection and prevention of terrorism.
If SWIFT refuses to do this claiming that it can only implement changes based on what its member banks require, the solution may be for each government to demand any local bank (that is a member of SWIFT) to require SWIFT to implement this centralisation and monitoring work (as well as to update the SWIFT system to include beneficial ownership data, as mentioned in point 2 above).
A first partial solution would be for banks to report all of their transactions on a daily basis to a government authority, eg the Central Bank or the Financial Intelligence Unit, so that analyses can be run at the national level. This wouldn’t be as good as centralising and analysing information at the global level, but it would be a very good start. For instance, banks in Australia must report the equivalent of SWIFT data for every international bank transfer to a central authority.
Now some new ideas we haven’t discussed before:
10. Checking the ownership chain up to the beneficial owner. Banks should refrain from opening accounts unless they can directly check the ownership of every entity integrating the ownership chain of the customer, in the corresponding commercial register. For instance, if the customer is Company A from the UK, owned by Company B from Delaware and allegedly owned by John, a bank should be able to obtain legal ownership information from the registries available in the UK and the US to confirm that John is the beneficial owner. If any of the country links fails to provide this information, the bank shouldn’t open the bank account, regardless of the information self-reported by the customer. This would put pressure on jurisdictions to establish public registries of legal ownership and beneficial ownership.
11. Banks exchanging information on suspicious cases and patterns. As explained in point 6, the UK is working on a system for banks to confidentially exchange information with each other to detect discrepancies (without disclosing the actual details of their customer). By the same token, banks should be able to confidentially exchange with each other (without access to the actual personal details), or through a central database held by the financial intelligence unit, information about trends, patterns as well as cases of closure or rejection of accounts, or the filing of a suspicious transaction report.
For instance, if bank A wanted to make a bank transfer for customer X, they would have to check this central database to make sure that no bank has closed or reported a transaction for that same customer. The lack of a warning or the presence of a warning shouldn’t be binding, but the presence of a red-flag reported by another bank (without knowing which one), should alert the bank to the need to potentially do enhanced due diligence. If the red flag warning indicated why the account is flagged, eg “suspicions on the source of funds”, the bank would then know what to look into.
A bank would still be able to go along with the transaction, but if in the end it is revealed that the transaction was involved in a money laundering case, the bank should be subject to heavier sanctions, given that they disregarded the warnings by other banks. This would prevent risky customers from finding more ‘flexible’ banks to open their accounts with.
At the very least banks should be able to share these (anonymous) customer risks within members of the same banking group, even if located abroad. Given that these measures also create risks (eg banks relying solely on third-party risk assessments, de-risking which excludes certain people), these measures should be monitored to prevent negative consequences, and could be reserved for extremely high-risk situations, where the money laundering risk is almost certain (eg similar to an in fraganti illegal activity).
12. Hierarchical approval for moving forward with any customer that triggered a suspicious transaction report. Any risk situation, eg establishing a relationship with a customer rejected or flagged by another bank (based on point 11), or moving forward with a bank transfer that triggered the filing of a suspicious transaction report should require the justification and signature of a responsible hierarchical authority. In other words, if a situation, customer or request of a transaction triggered the filing of a suspicious transaction report, a bank should only be allowed to move forward if a hierarchical authority puts on the record a written justification and authorisation to move forward. This could be used in the future to prove reckless actions by banks and their employees, in case of a money laundering investigation.
13. Track or prevent transactions. An alternative or addition to the two points above would be that the recipient bank of any transaction that was alerted or that triggered a suspicious transaction report should monitor that account for, say, 30 days. During that time, any subsequent bank receiving funds from that account should be subject to the same tracking and monitoring requirement. If the customer then intended to do a transaction that prevented further tracking (eg a bank in a different country, the withdrawal of money in cash or its conversion into crypto-currencies), such transaction should be delayed until the original bank (or the financial intelligence unit) confirms that the subsequent transactions do not involve any money laundering risk.
The way to enforce this would be the following: the bank that filed the suspicious transaction report, and all other banks involved (the recipient bank and any subsequent bank that receives funds from the recipient account) would have to report all the transactions related to those accounts for say, 30 days to the Financial Intelligence Unit. At the very least, this extra monitoring may discourage banks from accepting those customers or allowing the transaction. The alternative, not to file a suspicious transaction report, may be a breach of the law (that’s why banks currently file suspicious transaction reports, sometimes excessively).
D: Suspicious transactions reports
14. Report suspicious transactions in real time. Any suspicious transaction report filed later than 24 hours or 48 hours should be subject to sanctions. Given that money may be transferred and withdrawn in minutes, suspicious transactions reports should occur in real-time, ideally before the transaction takes place. Reports about transactions that are weeks or months old are useful sources of information, but have no practical use in preventing illegal transfers or recovering money.
This requirement for real-time checks may result in financial transactions taking more time than they currently do (to allow for proper checks and approvals, many of which would be automated). However, people may have to adapt to this. (We never get tired of reminding people about the case of airports. Decades ago, taking a flight was much faster with much fewer security checks on the luggage and personal belonging of passengers. Now, people have got used to not having any liquids in their carry-ons, so it’s a matter of adaptation).
15. Preventing “over-reporting” as a way to compensate the low quality reporting. The current system where banks are penalised for failing to file a suspicious transaction report to the financial intelligence unit, or where no one actually monitors or sanctions the quality of the reports, only creates an incentive to file them excessively and with low-quality. For this reason, in addition to giving feedback on the quality of the suspicious transaction reports, and statistics of the filings by other banks, the financial intelligence unit should sanction poor quality, excessive filings.
16. Sanctioning the lack of actions by banks. While banks are required to file suspicious transactions reports, they should be sanctioned in cases where they have many red-flags on one account, and nevertheless, decide to allow the transaction. In other words, in addition to sanctioning the under-reporting of banks, there should be clear criteria to prevent particularly suspicious transfers from taking place (eg a customer that triggered more than two suspicious transaction reports, a transaction worth much more than the source of funds declared by the customer, etc). To avoid excessive bureaucracy, the system could work by shifting the burden of proof. While the presence of these factors should be an indication that the bank should not perform the transfer, if the bank is convinced and may prove that the transaction is safe, it could decide to go ahead. If proven wrong, the sanctions should be heftier. This should be accompanied by point 12, where a hierarchical authority must give written justification and authorisation for going ahead with the red flagged transactions.
E: Coordination and transparency
17. Disclosure of anti-money laundering breaches. Based on the “naming and shaming” measures, countries should publish details, including the name of the bank and the case description, of any failures to implement preventive measures (eg under-filing or over-filing suspicious transaction reports, transferring money without beneficial ownership data, etc). This will also help each bank determine which other institutions represent a higher risk. In addition, countries should publish information on the fines, prosecutions, investigations or other sanctions (including the firing of directors or other staff) to monitor enforcement of these preventive measures.
18. Regional coordination. To monitor enforcement of the measures and transparency requirements, and to have a global overview and analysis of money laundering schemes, regional or multi-national authorities should be established. For instance, Joshua Kirschenbaum [N2][AK3][AK4] has been calling for the EU to establish a European money-laundering supervisor.
Finally, it may be the case that heftier sanctions should be imposed in general, including personal liability for bank directors or losing of licenses to operate in certain countries.
If you have any comments on our proposals or if you have additional ideas, please write to [email protected]
* This blog post received very useful feedback and ideas from Markus Meinzer, Maira Martini, Agustin Carrara and others who prefer to remain anoymous.
It is tempting for reformers to adopt the language of national security in pursuit of policies that would help protect the interests of popular constituencies. But we should be wary that we don’t operate in a register that is far more congenial to our opponents. In this guest blog, reproduced from this recent edition of our flagship publication, Tax Justice Focus, Grace Blakeley draws the outlines of the trap, and suggests how we might best avoid it.
The Elephant Trap: The Language of National Security and the Politics of Liberation
Grace Blakeley
Discussing the wildfires that were ravaging the West Coast of America, Joe Biden recently called Donald Trump a ’climate arsonist’ as he called climate breakdown a threat to America’s national security. In a bid to display his patriotism, Biden has frequently drawn on the theme of national security – an issue generally reserved for those on the right; he recently tweeted that every day Trump is in office is ‘another day our enemies are emboldened and the American people are at risk.’
Confident in their understanding of the mantras of median voter theory, many politicians believe that in borrowing the right’s language, they can weaken its hegemony. From Prime Minister Tony Blair’s famous slogan ’tough on crime, tough on the causes of crime’, to later Labour leader Ed Miliband’s mugs emblazoned with ’controls on migration’, British politicians are just as likely to fall into this trap.
In fact, rather than weakening the appeal of right-wing politics, such narratives tend to strengthen it. Language is not neutral – by using certain frames, politicians bring to mind particular stories and narratives that shape voters’ emotions and behaviour.[1]
‘National security’ and ’law and order’ bring to mind a bundle of other concepts like war, terrorism and crime that catalyse feelings of fear and anger in many voters. And voters who are primed for emotions like fear and anger are more likely to vote for right-wing parties that promise authoritarian policies, delivered by a strong-man candidate who can defend the dominant voting group from the threat posed by ‘outsiders’ .[2]
Progressive candidates tend to do best when they are able to build mass support for social transformation based on a vision of society in which everyone has their basic needs met. Anat Shenker Osario’s research has shown that voters are more likely to opt for progressive candidates and policies when politicians use language that unifies people based on an understanding of their common wants and needs – their common humanity – than when politicians attempt to negate the frames of the right. In fact, Shenker-Osario’s research has shown that in attempting to negate the right’s frames, progressives actually reinforce the power of those frames.[3]
But frames aren’t enough on their own; to be used effectively, they have to be woven into a compelling story. Stories, Lakoff reminds us, have a particular structure (beginning, middle and end) and an easily-identifiable cast of characters (hero, villain, victim).[4] More often than not, those on the left only tell half a story: they identify a problem without saying who caused it – they give us a story with no characters, and leave themselves vulnerable to counter-narratives that shift the blame onto convenient scapegoats.[5] Progressive politicians who centre issues like inequality, poverty and climate breakdown without pointing out that these issues have been caused by a wealthy elite that grows rich on the hard work of others will often find themselves outmanoeuvred by right-wingers who concede that society has become too unequal, but instead blame benefits claimants and migrants.
This is not to say that any use of the words ‘security’ or ‘order’ by left wing candidates will fail to generate the desired response. But if we are to avoid the linguistic traps laid by the right these terms need to be reframed. Progressives, if they do use such language, must try to recontextualise terms like ‘security’ and ‘disorder’ by placing them within a wider narrative that shifts blame for in-security and dis-order away from working people and towards the ruling class. The former leader of the opposition Jeremy Corbyn, for example, used the term ‘national security’ in a speech after the Manchester bombings in which he condemned the UK’s foreign policy because it made the British people less safe. But he did so while providing a clear story as to why this was the case – complete with the war-mongering British ruling class as its central villain – and, crucially, while offering an alternative vision of the future based on our collective capacity to organise in order to hold this villain to account.
But when Biden talks about climate breakdown in terms of the threat it poses to national security, without placing this in the context of a coherent and compelling narrative that explains why, he is simply encouraging voters to feel fear at the prospect of wildfires, food shortages and extreme weather events. And unless he develops a coherent strategy to direct blame for these events towards those most responsible for them – fossil fuel executives, the bankers that fund them and the political class that subsidises them – voters will simply find another group to blame for their feelings of fear.
The fear catalysed by constant discussion of climate breakdown, without either a positive plan for dealing with it or a clear group to blame for it will create a space that the right will fill with more xenophobia, nationalism and division. It is easy to imagine future right-wing administrations responding to the national security threat posed by climate breakdown by shutting down borders, further restricting other states’ access to green technologies and – perhaps most terrifying of all – waging wars with other states over scarce resources. The British military has already begun to prepare for the resource conflicts it anticipates resulting from a 4 degrees Celsius rise in global temperatures that it now considers inevitable.[6]
The same lessons apply to questions of tax justice and inequality. As other contributors to this collection have noted, there is a convincing case to be made that systematic tax avoidance and evasion and inequality are both threats to our collective security. The FinCEN files have recently revealed how some of the world’s biggest banks – many headquartered in the UK – have allowed criminals to move their money around the world (BBC, 2020).[7] Occasionally, investigations reveal that the UK’s financial system is actively undermining the aims of UK foreign policy: UK banks have been fined for undermining sanctions on Iran and Russia, and for laundering money for Mexican drug cartels.[8]
Similarly, high levels of inequality undermine many other stated policy aims of successive UK governments. In recent years, a decades-long trend of falling violent crime rates has been reversed. There are numerous explanations for this reversal – including rising poverty and cuts to funding for youth services – but the single biggest predictor of violent crime over time and across countries is the level of inequality.[9]
Inequality and tax avoidance undoubtedly make our societies less safe, just as climate breakdown does. But the language we use to describe these trends is very important. By repurposing right-wing tropes to describe the problems we care about, we may subconsciously increase the power of reactionary, authoritarian politicians. Saying ‘inequality is a threat to our national security’ is likely to make voters feel scared, or angry at those who pose the perceived threat – both of which are emotions that are systematically correlated with higher support for right-wing populist parties.
Progressives need to develop their own language and their own stories to describe the problems our world faces. Shenker-Osario has undertaken in-depth research with volunteers in multiple different countries, and the same finding has consistently emerged: campaign messaging that engages the base and alienates the opposition is the most persuasive to undecided voters. Having the 15% of people who passionately agree with you – along with the 15% of people who passionately oppose you – repeat your message over and over makes that message infinitely more powerful. Trump, Johnson and others know this, and use this messaging strategy very effectively. But the left is falling into their trap by repeating right-wing frames like ‘national security’ and ‘law and order’; even when negating these frames, we increase their appeal in the general population.
Rather than feeding into narratives based on fear, it is critical for the left to paint a positive vision of the world we could build, if we are able to work together to defeat the vested interests that stand in the way. If we want to overcome climate breakdown, inequality and all the multiple other social problems that our world currently faces, we must clearly identify those problems, ascribe blame to those most responsible for causing them, and paint a clear vision as to how we can work together to overcome them. The Green New Deal, which aims to create jobs and reduce inequality while facilitating decarbonisation, is clearly an incredibly powerful frame that can be used to do just this. Rather than attempting to scare people into voting for the left – a strategy that can only ever help those on the right – we need to encourage them to believe that the world can be different. In other words, we need a politics based on the language of hope.
You can access the Tax Justice Focus edition on National Security here
Grace Blakeley is an author whose books include Stolen: How to Save the World from Financialisation and The Corona Crash: How the Pandemic will Change Capitalism. Grace is a staff writer at Tribune magazine, where she hosts thepodcast A World to Win.
[2] Rico, G, Guinjoan, M and Anduiza, E, ‘The Emotional Underpinnings of Populism: How Anger and Fear Affect Populist Attitudes’, Swiss Political Science Review 23(4): 444–461, 2017; Pavlos Vasilopoulos, George E. Marcus, Nicholas Valentino and Martial Foucault, ‘Fear, Anger, and Voting for the Far Right: Evidence From the November 13, 2015 Paris Terror Attacks’, Political Psychology, 40(4), 2019.
[3] Shenker Osario, A, Messaging this Moment: A handbook for progressive communciators, 2017
[4] Lakoff, G, Thinking Points, 2006; Lakoff, G, ‘Metaphor and War: The Metaphor System Used to Justify War in the Gulf’, Peace Research 2, pp. 25-32, 1991
Welcome to the 35th edition of our Arabic podcast/radio show Taxes Simply الجباية ببساطة contributing to tax justice public debate around the world. Taxes Simply الجباية ببساطة is produced and presented by Walid Ben Rhouma. The programme is available for listeners to download and it’s also available for free to any radio stations who’d like to broadcast it or websites who’d like to share it. You can also join the programme on Facebook and on Twitter.
الجباية ببساطة #٣٥ – آل سعود في قائمة العائلات الأغنى في العالم وتحسّن لمصر في مؤشر العدالة الضريبية أهلا بكم في العدد الخامس والثلاثين من الجباية ببساطة، . في هذا العدد سلطنا الضوء على قائمة العائلات الأغنى في العالم والتي جاءت عائلة آل سعود في مراتبها الخمس الأولى. دائما في أخبارنا المتفرقة، تحدثنا عن عجز الموازنة في المملكة العربية السعودية في ظل تراجع ايرادات النفط و تنامي العجز التجاري التركي وتأثيره على مستوى سعر صرف الليرة التركية. في الجزء الثاني من الحلقة، حاور وليد بن رحومة الباحث الإقتصادي عمر غنام حول مؤشر العدالة الضريبية لسنة 2020 والذي سيصدر قريبا
Pour la 21ème édition de votre podcast en français sur la justice fiscale et sociale en Afrique et dans le monde proposée par Tax Justice Network avec Idriss Linge, nous revenons sur la récente sortie de l’ICRICT (la Commission Indépendante pour la Réforme de la fiscalité internationale des entreprises), qui souhaite voir l’Organisation pour la Coopération et le Développement Economique (OCDE), accélérer les réformes qu’elle a entreprises pour la réforme de la fiscalité internationale des grands groupes mondiaux. Nous revenons aussi sur la critique par un réseau d’ONG internationale, notamment Eurodad, qui estime insuffisante, l’Initiative actuelle de suspension du remboursement des dettes par les pays pauvres.
Et pour ceux qui ont l’application Stitcher et iTunes ect
Si vous souhaitez recevoir cette production ou être média partenaires ou simplement contribuer, vous pouvez nous écrire à l’adresse Impô[email protected]
Attempts to tackle corruption have tended to work with a narrow, legalistic definition of the phenomenon, which leaves much that should concern us either out of focus or altogether invisible. In this guest blog, cross-posted from our recent edition of Tax Justice Focus on national security, Camila Vergara draws on a long-neglected strand in the history of political thought to provide an account of corruption that is equal to needs of democratic reformers.
Camila Vergara
Corruption seems to be everywhere, despite multiple laws, rules, guidelines, and institutions aimed at increasing government transparency and punishing undue influence. This is because corruption is seen as an individual crime rather than a systemic tendency. We need to move away from the ‘bad apples’ approach, in which corruption exists only because there are corrupt people in office, and look at the structure in which these corrupt elites are embedded. What I call systemic corruption refers to the inner functioning of the state order, independent of who occupies the places of power in it. Since democracy is a political regime in which an electoral majority is supposed to rule, it makes sense to think that ‘good’ democratic government would benefit (or at least not hurt) the interests of the majority. When the social wealth that is collectively created is consistently and increasingly accumulated by a small minority against the material interests of the majority, then it means that the rules of the game and how they are being used and abused are benefiting the powerful few instead of the many. This trend of oligarchization of power within a general respect for the rule of law provides convincing evidence for the systemic corruption of representative democracy—even if we are still unable to measure it properly.
According to Transparency International’s Corruption Perceptions Index, two thirds of countries suffer from ‘endemic corruption,’ a kind of ‘systemic grand corruption that violates human rights, prevents sustainable development and fuels social exclusion.’ But while Transparency International claims corruption is enabling the violation of human rights across the globe, it also acknowledges that corruption cannot be properly measured given the diversity of legal systems (what is considered corrupt in one country is not necessarily illegal in another) and the disparities in the enforcement of norms on the ground. Consequently, the index relies on individuals’ perception of corruption to track long-term variations—even if individual perceptions cannot be disentangled from the existing local culture of corruption. This methodological deficiency makes evident that the actual levels of corruption are much worse than those currently being recorded.
The current approach to measuring corruption does not consider an independent standard to judge the law itself, and thus makes it difficult to push back against the introduction, normalization, and legalization of vehicles for corruption. The regulation of lobbying, for example, demonstrates that having paid peddlers for special interests can become perfectly legal—even if it clearly strengthens the undue influence of the superrich and their corporations in politics. Given the complex relation between corruption and the law, conceiving and measuring corruption by focusing only on the agents of corruption and their exchanges, is not only ineffective for combating individual acts of corruption —tax havens and shelters make quid pro quo corruption extremely difficult to trace and thus prosecute— but they also leave us unable to track systemic corruption, the degree to which the rules of the game are designed to benefit disproportionally and systematically those at the very top of the wealth distribution to the detriment of the majority of citizens.
We have tended to rationalize and downplay the oligarchization of power in society by using indexes that miss important aspects of the process. For example, the Gini Index underestimates inequality at its most politically significant point, among the superrich, since they tend to stash their wealth in offshore accounts, where it disappears from view. Much like the Corruption Perceptions Index, which is unable to accurately measure corruption, the Gini Index is unable to capture the real degree of inequality because of the massive amounts of wealth that oligarchs from all around the world have been shielding from taxation and scrutiny for decades.
While for most of the 20th century systemic corruption waxed and waned, and its increase meant national oligarchs and their corporations were able to temporally control parts of government and obtain favourable policies, laws, and verdicts with impunity, today the oligarchic class, as well as part of its wealth, is transnational—corporate profits being constantly shifted around, following liability-reduction strategies. Therefore, the threat of oligarchic power is today not only against democratic governance but also compromises national security since there is no easy way to know if the oligarchs indirectly funding parties, politicians, lawmakers, and judges are domestic or foreign. How can the state protect the population from external threats that are operating within existing legality? ‘Following the money’ to unveil a corruption scheme or a terrorist network is extremely difficult given that oligarchs have access to a global league of corporate lawyers, who are experts in protecting assets from taxation and burdensome regulations, and in hiding identities behind legal code.
Tax havens and the legal provisions shielding assets from taxation and scrutiny are both a symptom of systemic corruption and an accelerator of the oligarchic takeover of the political power structures. The establishment of legal loopholes beneficial to the superrich has historically been the result of the pressure exerted by already powerful corporate interests. The first tax havens were created in the late 19th century in the states of Delaware and New Jersey, where incorporation rules were relaxed to attract non-resident companies. Paired with the hegemonic laissez faire ideology of the turn of the century, lower corporate tax rates allowed for the already rich and powerful to accumulate wealth to an unprecedented degree in the United States. Part of the tax-free profits of corporations was then used to influence government to further mould regulations according to their interests, fuelling corruption. The Tillman Act of 1907 came to prohibit corporations from directly financing political campaigns, but lacked enforcement mechanisms and allowed for loopholes. Today Delaware gives tax shelter to about half of all publicly-traded U.S. corporations, among them Apple and Wal-Mart, and corporate donors are legally allowed to bypass campaign finance prohibitions and pour millions of dollars into Political Action Committees (PACs), which they then donate to political candidates.
Across the ocean, England also innovated early to favor the wealthy. In a 1929 court case[1] non-resident corporations —British companies with no actual business in England— were freed from taxation. This judicial verdict effectively allowed for a tax-free exploitation of the colonies by British companies incorporated in Jersey, Bermuda, or the Cayman Islands. This privileged non-resident status was then extended to financial operations when in 1957 the Bank of England declared non-resident transactions off limits to regulation and taxation.
The tax evasion by the superrich that originated in the first half of the 20th century reached a turning point in 1983 when U.S. courts allowed the first multinational to move to a tax haven to avoid paying taxes. This judicial authorization of profit shifting strategies meant that the windfall of corporate profits resulting from the deregulation plan of the Reagan administration were moved abroad. This not only decreased state revenue and social spending but also increased inequality and the rate of wealth accumulation at the very top. According to the Gini Index, inequality in the U.S. has increased sharply in the last four decades and today has the highest rate of the G-7 countries. This jump in inequality in the U.S. is of course much worse, considering that the superrich stash away a big chunk of their wealth offshore, which is not included in the measurements. According to recent estimates, around 40% of multinational profits are shifted to the more than 90 financial secrecy jurisdictions around the world, which now hold as much as $36 trillion dollars of untaxed and anonymous private wealth.[2] How can any State make sure that part of this untraceable money does not end up being used against the interests and safety of their populations?
The progressive takeover of political power by an oligarchic class that shapes policy, law, and judicial adjudication for their own benefit, from behind the scenes, is an intensifying threat to national security. Since it is currently legal for corporations to exploit loopholes and wrap their assets in legal secrecy to avoid scrutiny, domestic terrorist cells funded with corporate offshore money could remain undetected until it is too late. A regulatory framework that is ill-equipped for taxing the superrich and for keeping tabs on their money, cannot fare much better when trying to discover if this untaxed, untraceable money is being used by foreign powers planning to attack the State. The privileges of the superrich—which allow them to bypass the rules meant to curtail their economic power and undue influence—have left states powerless to effectively curtail corruption and protect their populations against foreign attacks. National security cannot be realistically assured if states keep allowing corporations to profit without limits and to shift their profits to avoid taxation, regulations, and oversight.
Camila Vergara is a critical theorist, historian, and journalist from Chile writing on the relation between inequality, corruption, and domination. She is a Postdoctoral Research Scholar at the Eric H. Holder Jr. Initiative for Civil and Political Rights at Columbia University Law School, and author of Systemic Corruption. Constitutional Ideas for an Anti-Oligarchic Republic (Princeton University Press 2020).
[1] Egyptian Delta Land and Investment Co. Ltd. v. Todd
[2] James S. Henry, “Taxing Tax Havens. How to Respond to the Panama Papers” Foreign Affairs, April 12, 2016.
In this episode of the Tax Justice Network’s monthly podcast, the Taxcast, we go on a reparational justice journey and speak to the Council for World Mission about their Legacies of Slavery project.
Plus: austerity’s out, public investment is now in?! We discuss the IMF’s hypocritical turn around – now poorer countries need apologies and restitution…
Hosted and produced by Naomi Fowler of the Tax Justice Network
The transcript is available HERE (some is automated and may not be 100% accurate)
In the reparations movement, they talk about a process of kind of if it’s for us, but not with us, it’s not authentic. So I think that that has to be really remembered in this, it has to be a structured process within the context of international African social movements for reparations.
It’s really important to think who is asking different bodies to do this work? On whose mandate and who are these constituencies that this work seeks to report for, seeks to action change for? The principle of consultation and participation has to be present.“
~ Priya Lukka, economist and reparations specialist
For me, [reparational justice] is about acknowledging the past and the history of exploitation that our capitalist systems are particularly mired in. But it’s also about reaching towards the vision and goals of what our shared human life can be like, especially when we bring economic justice and the potential of our economies to bear to the full.“
~ Rev Dr Peter Cruchley, Council for World Mission
The pandemic is forcing a long overdue rethink of economics. And this rethink has reached the very highest level of economic policy-making. When the International Monetary Fund issues policy advice to governments that they need to foster a strong recovery from the pandemic, even if this takes the level of public debt to record over 100% of global domestic product by the year end 2020, we have clearly entered new territory.“
~ John Christensen, Tax Justice Network
There’s never been a more obvious time to talk about reparational justice. For so many decades the IMF and World Bank have been advising poorer nations struggling economically to sell their most valuable assets, open up their markets, supposedly to investment, which turns out to be extraction. They’ve told them to cut back on their public services. But now that wealthy governments are sort of like rabbits caught in the COVID headlights, the IMF and the World Bank have done a total turnaround. And they’re calling on governments to increase public investment to aid an economic recovery and create jobs!”
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Quando impostos se destinam a taxar poderosos a elite econômico-financeira do mundonos faz acreditar que são verdadeiros fantasmas. Mas o episódio #18 do É da sua conta desmistifica a tributação sobre transações financeiras e mostra como esse imposto pode, com um desenho adequado, reduzir desigualdades ao taxar mais quem tem mais dinheiro e o setor financeiro.
O podcast explora as vantagens desse imposto como um meio para governos regularem melhor o fluxo de capital no mundo e arrecadarem de forma mais justa , transparente e diminuindo a “maldição” da financeirização. Ouça o podcast e descubra como o imposto vem sendo proposto em Nova York e União Europeia e colocado em prática no Quênia.
Yes, we can build an open and transparent tax system that works fairly for everyone. Do you know how multinationals shift their profits to dodge their taxes and how we can stop them? Our beautifully illustrated new videos tell you how, narrated in five different languages by our tax justice podcast teams. They explain how governments can put a stop to transfer pricing and profit shifting, end the race to the bottom between nations on tax, and restore the link between where business activity happens and where tax gets paid. You can read all about Unitary Taxation here.
You can listen to our unique monthly podcasts on tax justice, corruption and economic transformation in the public interest in English, Spanish, Arabic, French and Portuguese.
Click below to watch and share the video in your preferred language:
English Winning the Fight for Tax Justice: how do we make multinationals pay?
French Gagner la bataille pour la justice fiscale – comment faire payer les multinationales?
Spanish Ganar la lucha por la justicia fiscal: ¿cómo hacemos que las multinacionales paguen?
Portuguese Vencendo a batalha pela justiça social: como fazer as multinacionais pagarem?
Arabic الفوز في المعركة من أجل العدالة الضريبية – كيف نجب
Every year, corporate tax avoidance costs countries around the world an estimated US$ 500 billion or more. One reason for these losses is that companies are able to hide their financial affairs: from tax authorities, and from the public. More transparency will improve tax collection, and help pay for many public goods such as hospitals.
Since the 1970s, civil society groups have been pushing for a powerful transparency tool called Public Country by Country Reporting (CbCR) – which aims to get multinationals to report (and publish) details of their financial and tax affairs, broken down for every country where they do business. Until recently, these calls were opposed by powerful corporate lobbyists and fell on deaf ears: companies could scoop up their financial and tax results from several countries into one global or set of regional figures, which could not be unpicked to find out what is happening in each country.
Following sustained pressure from the tax justice movement, however, world leaders have started to give way. Little by little, governments and global institutions are mandating this form of corporate tax transparency – though still only up to a point.
For instance, European banks have had to publish their key financial data since 2015 — but this information is often difficult to find, complex, and presented in incompatible forms. A new report published a few hours ago by Transparency International, entitled Murky Havens and Phantom Profits: The Tax Affairs of EU and UK Banks, provides welcome clarity, showing both the improvements in transparency and the distance still to go. As others have noted: the data here is still not good enough.
Right now, a more focused, time-limited opportunity for reform has also opened up in the EU. A new report, also today, from Campact and Corporate Europe Observatory, notes that Germany’s Economy Minister Peter Altmaier is currently standing in the way of a proposal to mandate better transparency in Europe – and you can help break the deadlock. The report contains a petition, also supported by our German sister organisation, Netzwerk Steuergerechtigkeit:
Click here to find out who to send it to, and how. Please don’t delay. This window of opportunity will not be open for long.
If the EU can take the step to make the right kind of CbCR data public, then most of the remaining political objections to CbCR will be swept aside, including for lower-income countries. This is the moment, and we must seize it.
We recently published a special edition of Tax Justice Focus on national security, guest edited by Jack Blum, Charles Davidson and Ben Judah. You can read their editorial here. In the following article, Yakov Feygin from the Berggruen Institute, argues that the United States could and should use its central position in the global monetary system to tackle the related phenomena of tax avoidance and corruption.
The Financial Infrastructure of Corruption
Yakov Feygin
National security practitioners have become increasingly aware of the threat of ‘Kleptocratic regimes’ and ‘strategic corruption’ to the internal politics of liberal-democratic polities. In the classical version of this narrative, authoritarian regimes exploit global financial and business networks to penetrate the internal politics of democratic societies and secure their domestic rule by exploiting the self-interest of particular business groups.[1] Some have even suggested that foreign ‘dark money’ might enter the democratic process by supporting particular candidates.[2] The common thread that unites these views is that dark money is seen as a foreign policy problem and thus related to either extra-systemic actors or foreign competitors that exploit legitimate systems.
Viewing this issue as only the result of ‘corruption’ or as an aspect of power politics alone is flawed. The dangers highlighted above are not the result of aberrations in an otherwise functioning system that can be patched by some legal reforms. Rather they are a feature of how the international financial system has evolved to serve the world’s most powerful, whether they are kleptocrats in the developing world or reputable fortune 500 companies. The global financial infrastructure, as it has evolved in the post-war period, requires vast pools of offshore dollar accounts, so-called Eurodollars. This credit money, ‘issued at the book maker’s pen’ forms the basis for global payments and currency exchange.[3] Within these money pools, often held in tax havens with opaque ownership law, it is impossible to distinguish kleptocratic activity ‘threats’ from ‘legitimate tax optimization’ by multinational corporations and high net worth individuals. Moreover, without these wholesale money market ‘deposits,’ the global monetary system would find itself short of liquidity as even formal bank institutions are deeplyintertwined with offshore finance.[4]
Instead of viewing these activities as national security threats created by the exploitation of a legitimate financing system by illegitimate actors, any attempt to curtail these activities must be done in the context of a radical reform of the global monetary order. This is not simply an academic distinction. If one sees kleptocracy as simply a form of corruption, the solutions presented are traditional anti-corruption measures focused on transparency and the strengthening of civil society. However, if we accept a systemic perspective that incorporates the centrality of offshore cash pools to the ‘dollar system,’ then we must take a broader perspective that calls for wholesale monetary reform and the mobilization of U.S. monetary power, specifically to move toward a ‘systemic’ reform of global capitalism itself.
The formal definition of a ‘Eurodollar’ is a dollar deposit in a non-American domiciled banking institution. As such, Eurodollars are pure credit instruments. They have no formal backing at the United States Federal Reserve. That means that unlike onshore credit money, Eurodollars have no explicit guarantee for their par value. As such, Eurodollars are secured via a set of inter-bank funding agreements benchmarked by the London Interbank Overnight Rate (LIBOR). Eurodollar deposits emerge when non-American domiciled firms book a dollar inflow in non-American domiciled banks. These banks then ultimately lend these deposits to other financial institutions that require immediate dollar funding and expect a dollar-denominated inflow at some future period. The creation of a Eurodollar deposit is represented in Figure 1 through a set of stylized balance sheets.
Figure 1: An Anatomy of a Eurodollar Placement [Marcia Stigum and Anthony Crescenzi, Stigum’s Money Market, 4E, 4th Edition (New York: McGraw-Hill Education, 2007), 217.]
As we can see, Eurodollars are initially funded through an interbank transaction with a U.S. domiciled bank and its foreign branch. From the point of view of the onshore money system, no actual dollars have left the United States. However, credit has now been issued that can ultimately be multiplied many times over to create a system of dollar funding.
Moreover, the term Eurodollar is often used not only to describe the specific type of money market instrument described above, but also the larger global market for wholesale dollar funding. This market and its instruments—Money Market Fund Shares, Repurchase Agreements (Repos), and asset-backed commercial paper—form the backbone of the global ‘shadow banking system.’ One can think of shadow banking as the expansion of the category of banking beyond registered bank holding companies. There is a robust academic debate as to what counts for deposits within this system, but a general consensus is that the key to the shadow banking system’s operation are large institutional cash pools, often held in offshore banking jurisdictions.[5] These pools of Eurodollar deposits – essentially credit entries – require cash inflows to validate holdings. As such, an army of money managers has arisento attempt to find returns for these large, global pools of cash.[6]
The Eurodollar system is thus ‘hybrid,’ insofar as dollar denomination depends on a state action—the U.S.-issued dollar—but is intermediated by and created through private credit. This is not an accidental arrangement but a set of political choices.[7] A popular legend holds that the offshore dollar market was created when the USSR, fearful of seizure, wanted to hold its dollar deposits outside of American banks. More realistically, the Eurodollar market seems to have arisen through intercorporate ‘swaps’ of currency liabilities designed to get around Bretton Woods-era capital controls. These swaps evolved into markets and eventually became the source of funding for offshore issued ‘Eurobonds.’[8] In the 1970s, as the Bretton Woods system began to collapse, regulators began to give up on efforts to coordinate to control this system and financial globalization was born.[9] More importantly, a whole industry of consultants, often with the encouragement of major governments, sprang up to offer newly decolonized states—often with common law systems—roadmaps to becoming offshore financial centers.[10]
The existence of shadow banking and wholesale Eurodollar financing makes it increasingly difficult to draw specific borders between national, and global financial systems and between legitimate transactions and kleptocratic activities and ‘strategic corruption.’ Disclosures of offshore structures such as the Panama Papers reveal a mix of both obviously political corruption and ‘normal’ corporate tax optimization. An anatomy of several transactions demonstrates just how similar and indistinguishable both activities are.
Take the ‘double Irish’ tax structure favored by pharmaceutical and technology companies. Company A in California develops a piece of software. It sells the patent for this software to a wholly-owned subsidiary in the Cayman Islands for one dollar. That subsidiary then revalues the patent to 100 dollars and pays no taxes on that re-evaluation. Next, the Cayman company ‘sells’ right to the patent to an Irish subsidiary of Company A, which markets and sells the software in Europe. The Irish company thus pays low taxes on European sales and renumerates its American parent through licensing fees, paid in dollars, to the Caymans subsidiary. Note that at this point, the Irish subsidiary has entered the Eurodollar market to transform its Euro receipts into dollar deposits and has then transferred those deposits to a bank in the Cayman Islands. This bank can now engage in Eurodollar funding with its dollar deposit. Meanwhile, the Cayman company can lend to the parent firm at a zero-interest rate to bring profits home or can purchase the parent firm’s assets. Taxes have been minimized with no violation of the law.[11]
Now, let us examine a ‘kleptocratic transaction’ that uses a similar set of channels. A politically exposed person (PEP) in Country A wishes to benefit from a privatization scheme of a state-owned company. To do this, the PEP sets up a company in Cyprus which has a tax treaty with Country A. The individual then swaps shares in the worthless Cyprus company owned by him and the valuable firm in Country A. Thus, the Country A firm’s profits are now captured, and it is effectively privatized. The firm in Cyprus then sells its shares, in dollars, to another firm owned by the PEP in the Cayman Islands, thereby eliminating any tax liability and creating a dollar deposit in the Cayman Islands. Again, these chains of firms have entered Eurodollar markets to both convert cash flows from Country A to dollars, and to then deposit these receipts. The PEP can now use his dollar deposit to purchase property in London or to make investments in an American PR campaign. Again, a dollar deposit is now created within the Caymans and, with the likely exception of laws in Country A being broken, nothing illegal has happened.
The parallels between ‘tax optimization’ and ‘corruption’ are so strong that the illegality of the latter is only present because in the United States, we have made tax optimization legal and acceptable de jure. Moreover, both of these schemes have created Eurodollar deposits that can then be lent and borrowed in the global dollar system to fund trade, investments, and capital goods that are completely unrelated to these transactions. The incentives for not tampering with this existing system are thus quite high.
The offshore financial system was created in the wake of the collapse of the Bretton Woods System as a means to avoid high-cost political decisions while allowing an increasingly globalized financial system to serve the needs of a global elite. While this elite was largely in line with the interest of the United States, the national security establishment has paid little attention to the misery that the offshore world has caused due to lost tax revenue, illegal privatization of public assets, and financial instability. Now, however, that these structures are not only used by multinational corporations but also by state-related actors that might threaten American sovereignty, the national security and foreign policy establishment has woken up.
The tools it has offered us to combat these problems are a mix of relatively effective measures to boost transparency and some half measures that at best will try to restrict access to the offshore world to legitimate actors. Indeed, beneficial ownership legislation, now being championed by many in Washington, will not only help American officials push foreign counterparts to adapt their own transparency legislation but give us better ideas about the American side of many transactions. However, there is an open question about whether this legislation alone will allow the United States to effectively deal with the holes of global sovereignty caused by the offshore world. Efforts to empower civil society in corrupt states are noble but will not address the root causes of what makes kleptocracy so simple: the easy movement of capital through offshore networks.
Most importantly, these policies do not take into account the fact that such transactions are critical to global dollar funding. If the United States is really serious about fighting offshore finance and kleptocracy, it has to put in some deep thought into what the outlines of a global financial system that replaces it would look like. At the original Bretton Woods Conference, John Maynard Keynes proposed a global clearinghouse system denominated in an international currency called Bancor. States would not actually use Bancor but would settle accounts in it.[12] States with persistent surpluses of Bancor would be charged a negative interest rate to encourage them to lend to states that needed funding. Capital controls would help contain private international finances.
It would be exceptionally hard for a New Bretton Woods to happen. However, we can simulate some of its features unilaterally and eliminate incentives for other countries to serve as nodes in the offshore system. A major reason that a country like the United Kingdom might want to be a tax shelter is to attract foreign exchange to its country and thus have sources of financing for development, as well as to sustain the value of its own currency relative to a global funding currency like the dollar. The United States has a tool to sustain the purchasing power of the UK’s currency: the central bank swap line. Swap lines came into public consciousness during the 2008 financial crisis, when the Fed allowed major central banks to exchange their local currencies for dollars to backstop Eurodollar deposits. During the COVID-19 crisis, larger swap interventions prevented a general, global economic collapse. The United States should consider giving countries with strong macroprudential policies, open trade practices, and, most importantly for this piece, transparent financial systems pre-approved access to Federal Reserve swap lines.
This would, of course, mean crowding out opportunities for private finance to intermediate global monetary transactions. However, if the United States is really serious about fighting global corruption, and treating it as a national security threat, the problem has to be cut out at its root. The centrality of private offshore banking and Eurodollar creation to global funding must be eliminated to counter global corruption, not only abroad but at home.
The United States, as the issuer of the world’s dominant currency, has a responsibility to sustain this ‘global public good’ in a manner that limits the ability of rentiers and oligarchs to exploit this public good. Without recapturing the role of global intermediation from private actors, we will never solve the problem of kleptocracy. A national security strategy that addresses these new threats must realize that the enemy is not a set of particular corrupt individuals, but the structure of global capitalism itself.
Yakov Feygin is Associate Director of the Future of Capitalism Program at the Berggruen Institute. This piece was first published in The American Intereston September 21, 2020.
[1] Ben Freeman, ‘America’s laws have always left it vulnerable to foreign influence’, Washington Post, October 19, 2019.
[2] Joseph Biden and Michael Carpenter, ‘Foreign dark money is threatening American democracy’, Politico, November 27, 2018
[3] Milton Friedman, ‘The Euro-Dollar Market: Some First Principles’, Federal Reserve Bank of St. Louis, September, 1971
[4] Iňaki Aldasoro, Wenqian and Esti Kemp, ‘Cross-border links between banks and non-bank financial institutions, BIS Quaterly Review, September 2020; Marco Cipriani and Julia Gouny, ‘The Eurodollar Market in the United States’, Liberty Street Economics, Federal Reserve Bank of New York, May 27, 2015
[5] Steffen Murau and Tobia Pforr, ‘Private Debt as Shadow Money: Conceptual Criteria, Empirical Evaluation and Implication for Financial Stability’, Private Debt Project, May, 2020
[6] Zoltan Poszar, ‘Shadow Banking: The Money View’, Office of Financial Research Working Paper, July 2, 2014; Daniela Gabor, ‘Critical macro-finance: A theoretical lens’, Finance and Society, 2020
[8] Perry Mehrling, The New Lombard Street, Princeton University Press, 2010
[9] Benjamin Braun, Arie Krampf, Steffen Murau, ‘Financial globalization as positive integration: monetary technocrats and the Eurodollar market in the 1970s’, Review of International Political Economy, March 22, 2020
[10] Vanessa Ogle, ‘Archipelago Capitalism: Tax Havens, Offshore Money, and the State’, The American Historical Review, December 2017
[11] Edward Helmore, ‘Google says it will no longer use “Double Irish, Dutch sandwich” tax loophole’, Guardian, January 1, 2020
[12] Luca Fantacci, ‘Why not bancor? Keynes’s currency as a solution to global imbalances’, unpublished draft, January 19, 2012
Image: NeoNazi_02″ by Chad Johnson is licensed under CC BY-NC-ND 2.0
This week we published a special edition of Tax Justice Focus on national security, guest edited by Jack Blum, Charles Davidson and Ben Judah. You can read their editorial here. In the coming days we will publish the five articles from this special edition, starting here with an article by TJN writer Nicholas Shaxson on the multiple ways in which tax havenry has undermined international and national security, worsening inequality and contributing to the rise of political extremism.
Tax havens harm our well-being and security
Nicholas Shaxson
Our beleaguered societies should learn a trick from the Weebles, an egg-shaped children’s toy popular in the 1970s which always righted itself after you pushed it over. As the advertising jingle put it: “Weebles Wobble But They Don’t Fall Down.” The secret was the weight in the toy’s base.
In this they reflected western societies at that time. A postwar order characterised by strong workplace protections, generous welfare provision funded by steeply progressive taxes, and effective curbs on concentrated corporate power meant that productivity gains were shared more or less equitably. Meanwhile, tight financial regulation curbed the ability of powerful financial interests to overrun the authority of democratic governments. This postwar order secured high levels of public support for liberal democracy. Since the advent of financial deregulation, however, power and wealth has become highly concentrated at the top end of the pyramid, and justifications for inequality have trickled down.
Not surprisingly, support for liberal democracy has frayed.[1]
As power and wealth concentrations have become ever more top-heavy, social cohesion and democracy have become pushovers. Illiberal and anti-democratic actors, domestic and foreign, are on the offensive, corrupting our institutions, our media and our political processes. Inequality on its own is toxic enough: historically it has overturned empires, dictatorships, theocracies and democracies, and at times led to war. As inequality spreads, the likelihood of bloodshed rises.
But the issues and mechanisms that the tax justice movement focuses on – tax havens, shell companies, offshore trusts, corporate tax cheat structures – are especially corrosive. The threats to our collective security lie on many levels, each more insidious and pernicious than the others.
First, most obviously, tax havens reward rich people at the expense of poorer people, worsening inequality and deepening schisms.
Second, tax havens corrupt markets, allowing tax cheats to free-ride on public services, and rewarding large corporations at the expense of small and medium enterprises, worsening the problems of monopoly and concentrated corporate power.
Third, many of these tools are about hiding. This has destabilising effects, inflicting damage on our cultural, political and economic institutions. Tax havens are hothouses for organised crime, helping criminals and oligarchs to penetrate the heart of many governments. Major revelations, from the 2016 Panama Papers to Tom Burgis’ new book Kleptopia, have exposed how British tax havens helped Russian oligarchs amass secret wealth (and power,) and how their fortunes merged with those of the post-Soviet organised criminal underworld such as Semyon Mogilevich, whose core talent has been “to slink [criminal] money around the world incognito.” Worse, tax haven secrecy enables bribes and illegal political donations to flow undetected, making it increasingly difficult to trust the integrity of everyone from the Prime Minister and the President down.
All this undermines citizens’ faith in state institutions that are supposed to protect public interest. By allowing individuals and businesses to operate outside the law, tax havens offend against the principle of civic equality: one rule for them, one rule for us corrodes the social fabric on which so much depends. Equally dangerous, with the reputations of both London and New York tarnished by being labelled as laundromats for kleptocrats and organised crime, the soft power diplomatic advantages that the UK and USA previously enjoyed from being able to project moral authority across the world have been washed away by the sea of scandals.
Britain’s tax haven network helped accelerate the slide of nuclear-armed Russia into gangsterism, posing severe security threats to Britain itself. Citizens around the world, from Saudi Arabia to Russia to Venezuela, have seen for themselves how their national treasuries have been looted, and the proceeds stashed by élites in western tax havens. This looting has fomented public distrust and rage.
Undoubtedly tax havens hurt the countries suffering the plundered outflows, but they also pose grave threats to the economies receiving the inflows. Western countries playing the tax haven game have created a hydra, a monster which has turned around to bite them.
Illicit financial flows pose a range of political threats to the inflow countries. It diverts political leaders and civil servants away from the public interest, towards secret, more nefarious personal ends. It throws a lengthening shadow over academic institutions, think tanks, commentators, celebrities, influencers and media. An OECD report described how tax havens allow political parties to set up secret branches disguised as think tanks or foundations, “sometimes referred to as ‘offshore islands’ of political parties.” Tax haven funds combined with offshore-based media moguls prepared the way for Britain’s Brexit campaigners, leading to the destabilisation of relations with key political and military allies.
Tax havens are corrupting our leaders, our institutions and our democracies, generating yet more rage among the citizenry. When the last global financial crisis hit, western leaders largely didn’t change their economic policies in response to democratic pressure for change: instead, they subverted democracy to keep the same élites in power, and doubled down. The Covid crisis may worsen matters.
Decades of deregulation have left financial markets awash with illicit money seeking pliant host countries. Tax havens prosper by relaxing laws, rules, taxes and law enforcement, creating a criminogenic environment in the name of financial freedom. In the accelerating “global race” to attract hot money, countries ‘compete’ by offering yet more tax cuts, more regulatory loopholes, and outright subsidies to global elites and powerful corporations.
A bigger problem, though, is the devil’s bargain at the heart of this global race-to-the-bottom. Oligarchs, despots, organised crime, and other owners of rootless financial capital are so heavily invested in London and New York that their threats to disinvest and switch their wealth to Zurich or Singapore or Panama, have real potency. The misguided quest to attract the world’s hot money puts tremendous, unaccountable, direct power into the hands of malign actors, domestic and foreign. If this isn’t a threat to our democracy and collective security, it is hard to know what is.
Criminality isn’t the only problem confronting ‘inflow’ countries. Lax banking regulation brought us the global financial crash, and will deliver more crashes. Large inflows of financial capital into London and Wall Street generate a ‘brain drain’ into offshore-focused finance, damaging other economic sectors. Those same inflows push up local prices and the exchange rate, rendering it harder for manufacturers and producers to compete against imported goods, while also making housing unaffordable for young people. These problems, and the collective internal security risks they foment, are the essence of the finance curse.
The agencies tasked with protecting our collective national security, many steeped in countering terrorists radicalised by the plundering of their own countries in the Middle East and Africa, now need to recognise the scale of the threat to democracy and social stability emanating from kleptocrats, oligarchs, and organised crime. And they need to understand how this threat is structurally bound up with an army of professional enablers in accountancy, finance and law and an increasingly dysfunctional domestic economy.
Yet there is great hope here. That sea of rent-seeking and criminal capital isn’t the route to prosperity for western democracies: it’s a trap. We can simply step out of the race-to-the-bottom. Tax and regulate economic actors properly, and the predators will leave. The finance curse tells us that western tax havens, will be better off for it. And, as a further bonus, we will reduce the looting of poorer countries by their élites, curbing the rage. Like the Weebles of the 1970s, tackling tax havens would help us bounce back up again.
Image: NeoNazi_02″ by Chad Johnson is licensed under CC BY-NC-ND 2.0
The long recession precipitated by the 2008 financial crisis fed political failures across the world, increasing inequality and polarising societies to the point of social breakdown. As far-right movements threaten to take liberal democracies back to the 1930s, it is becoming increasingly clear that the offshore system, where wealth continues to accumulate in staggering quantities, is a source of serious and intensifying threats to international and national security. In this edition of Tax Justice Focus our guest editors Jack Blum, Charles Davidson and Ben Judah explore these threats and how we best tackle them. The following blog reproduces their editorial.
Editorial:Offshore, National Security And Britain’s Role
The British public is used to being warned of systemic threats: terrorism, weapons of mass destruction, Russian espionage, even climate change have been front and centre of the national debate over the preceding decades. However, the British public is much less used to a sustained presentation of the acute risks posed to national security by ungoverned spaces in the financial sector that is supposed to be the country’s competitive advantage. This special issue of the Tax Justice Focus aims to fill this void in the public’s understanding of these threats from the murky world of offshore finance.
Corruption, quite simply, is not small beer. Illicit finance, the proceeds of crime and corruption, is today a central feature of the world economy. The International Monetary Fund has estimated that money laundering accounts for between 2% to 5% of the world’s GDP. The ease with which criminal and corrupt money can move through multiple jurisdictions is the result of decades of failed regulation on both sides of the Atlantic, which has created a nexus of anonymous shell companies, secrecy jurisdictions and tax havens that come together to form the world of offshore finance.
Ilicit finance is emphatically not something that happens ’over there.’ Some estimates put the share of the UK’s GDP derived from money laundering as high as 15%.[1] London is both one of the critical nodes of the world financial system and a gateway to the offshore world: with countless financial and legal service providers ready to shuttle their clients’ wealth to secrecy jurisdictions under British sovereignty like the British Virgin Islands or the Cayman Islands which have become hubs of illegal activity. All this has helped London become a favoured location for oligarchs, whose needs and wants have become a staple of the professional services sector. Since David Cameron’s premiership, there has been growing concern in both London and Washington over growing Kremlin influence in the UK, suspicious murders and the connections of British politicians current and former to foreign autocrats. It has become a widely held view on both sides of the Atlantic and on both sides of the political divide that the UK has failed to tackle both the threat of money laundering and the political and security threats that come with it.
The following essays explore why failure has taken place and what can be done to remedy it. The first lens we use is structural. How does one situate the scale of illicit finance in an understanding of global financial flows? In our first essay Yakov Feygin, the Associate Director on the Future of Capitalism at the Berggruen Institute, takes a bird’s eye view of the system, exploring the relationship between the fundamental structures of global finance, the role of the dollar and the place of offshore finance as an enabler of corruption and authoritarianism. This is the international system in which Britain, the City of London and UK’s global territories find themselves.
What are the consequences for democracies existing in such an environment? In our second essay Camila Vergara, a Postdoctoral Research Scholar at the Eric H. Holder Jr. Initiative for Civil and Political Rights at Columbia Law School, investigates the rise of transnational oligarchic power and the struggle to protect domestic national security when the offshore system both facilitates oligarchic power within democratic societies and offers them enormous room for manoeuvre for malign influence. Vergara offers a framework to understand Britain’s backdrop of news stories concerning current and former politicians’ links to kleptocrats and authoritarian powers.
These are clearly threats to democracy: but what frame should progressives use when highlighting these dangers? In our third essay, Grace Blakeley, a staff writer at Tribune magazine and author most recently of The Corona Crash: How The Pandemic Will Change Capitalism, critiques the concept of national security from a left perspective and suggests a new way of conceptualizing these threats more in tune with progressive language. Blakeley sets out how progressives concerned by the rise of kleptocracy can reach new audiences.
In our fourth essay, moving onto solutions, Nicholas Shaxson, author most recently of The Finance Curse: How Global Finance Is Making Us All Poorer, argues that if we are to look to the US, EU and UK to use their hegemonic power to dismantle this system, they need to overturn the power of their own financial sectors. The way to do that is to harness national self-interest in each place, by showing how oversized financial centres harm the countries that host them. This harm is found in many spheres: economic, political, democratic, cultural — and in the domain of national security. And in our final essay Edoardo Saravalle, formerly of the Centre for New American Security and the Senate Banking Committee, makes the case for the United States promoting the transformation of privately controlled financial nodes like SWIFT into internationally controlled financial infrastructures to ensure that public goals, not private interests, set the agenda. Both essays set out what could be real foreign policy goals for a government determined to reshape global finance for the better.
As the editors of this series, we want to take this opportunity to contribute one final component to this discussion: the question of law enforcement. The sheer scale of illicit financial flows in the global system shows that the existing regime of international agreements and cooperating bodies has been largely toothless. The Financial Action Task Force (FATF) has been in existence since 1989 and has had powers to issue a blacklist and a greylist since 2000. The United Nations Convention Against Corruption (UNCAC) is now in force in all but a handful of countries. But despite this the ability to stem these financial flows — illustrated simply by the vast sums moving within and between national jurisdictions — remains lamentable and lacklustre. There is not so much a lack of tools as a lack of willingness to use them.
In Britain and the United States the understaffing of the bodies charged with defending the financial system is a threat in and of itself. For example, in Washington the key Financial Crimes Enforcement Network (FinCEN) has only around 300 staff and a budget of just $118m a year. Despite the vital role FinCEN plays its annual funding amounts to roughly the purchase cost of one F-35 jet. In the UK, the National Crime Agency, which deals with the full range of serious and organised crime, has less than 5000 staff and only around 1250 of them are investigators. Companies House, the body charged with registration of corporate entities in the UK employs less than 1000 staff despite over 4m companies being incorporated in Britain, with a further 500,000 new registrations every year.
Britain has a unique role to play in making finance safe for democracy. It is responsible not only for the City of London, which still competes with Wall Street as the capital of global finance, but also for Crown Dependencies and Overseas Territories such as the Isle of Man and the British Virgin Islands, which provide invaluable niche services to both licit and illicit actors. Should the UK choose to embrace a leadership role by enforcing the rules already on its books and staffing up adequately to meet the risk of financial insecurity it could achieve significant impact in cleaning up and closing down the loopholes of the offshore system. However, that same centrality to global finance also gives Britain a unique ability to be a bad actor. This is why it is in the interests of all the democracies that post-Brexit Britain brings meaningful transparency to both the metropolitan centre and the offshore periphery. A lively and robust debate in Britain about the security and democratic threats, not just lost tax revenue, posed by the offshore world is the first line of defence against such an eventuality. We hope this special issue of the Tax Justice Focus can help start it.
You can download the full version this edition of Tax Justice Focushere.
Jack Blum is a leading legal authority on money laundering who has helped investigate many major white collar crimes including the Bank of Credit and Commerce International (BCCI) collapse and the Lockheed overseas bribes scandal. Charles Davidson is editor and publisher of The Offshore Initiative (www.offshore-initiative.com) and was Executive Director of the Kleptocracy Initiative at Hudson Institute between 2014 and 2018. Ben Judah is the author of This Is London and Fragile Empire.
[1] Ali Alkaabi, Adrian Mccullagh, George Mohay, Nicholas Chantler, ‘A Comparative Analysis of the Extent of Money Laundering in Australia, UAE, UK and the USA,’ SSRN Electronic Journal, January, 2010.
Welcome to this month’s podcast and radio programme in Spanish with Marcelo Justo and Marta Nuñez, free to download and broadcast on radio networks across Latin America and Spain. ¡Bienvenidos y bienvenidas a nuestro podcast y programa radiofónico! Estamos en iTunesy tenemos un sitio web.Envien un correo electronico a Naomi [@] taxjustice.net para ser incorporado/a a nuestra lista de suscriptores.
En este programa con Marcelo Justo and Marta Nuñez:
Los principales bancos del mundo y el lavado de dinero del crimen organizado.
La OCDE confirma los datos de Tax Justice Network sobre la evasión y elusión fiscal de las multinacionales.
Los obstáculos políticos y mediáticos a un cambio de reglas fiscales en América Latina.
Y en tiempos de coronavirus, los avances que ha hecho la región en la lucha contra los paraísos fiscales.
Guest blog by Jesper Bertelsen, Danish Business Authority
The concept of a well-functioning beneficial owner register sounds achievable and easy, at a first glance. Simply put, legal entities check who their beneficial owners are, and enter this information into a system, in turn making it publicly available (at least for countries with public registers).
For the vast majority of legal entities in Denmark, and indeed the world, that task is straightforward. Law abiding legal entities simply register their beneficial owners because they are not interested in concealing their ownership. And, albeit with some formal errors and misinterpretations of the rules, this approach is well-functioning, and the published data about beneficial owners is mostly correct.
However, the purpose of a beneficial owner register is not fulfilled if it only caters to those entities that have the intention to play by the rules. Entities attempting to conceal their beneficial ownership, are indeed the most relevant entities to the governing authorities and financial intelligence units. The challenge for financial intelligence units and beneficial owner registers worldwide is to determine which entities are registering false information about their beneficial owners in order to conceal their ownership.
Therefore, the information that is entered into any beneficial owner register must be verified in order to ensure that the reported information is correct. To that extent, there are limitations on how far and in what quantities beneficial owner information can be verified, at least automatically.
How the Danish register verifies beneficial owner information
The Danish beneficial owner register is operated by the Danish Business Authority, which also operates the Central Corporate Registry. The Danish beneficial owner register is integrated into the Central Corporate Registry, meaning that all corporate information is available on the same webpage.
When a Danish person, registered with a Danish social security number (CPR-number), is registered as a director, board member, beneficial owner, legal owner or founder, the system automatically runs a series of checks. The system automatically retrieves the person’s address from the National Register. The system can also detect if the person is deceased or if the person has not registered an address, if the person is missing, and if the person is under the age of 18. All these parameters can be altered, so the effect of a person matching with one of these criteria can be altered.
For example, if a person is under the age of 18, this person cannot be registered as a part of an entity’s management. So, when a person tries to enter into the system that a minor is the director of a company, the system rejects the entry and the entry cannot even be reported. But, if a minor is registered as a beneficial owner, these system permits this to be submitted. But once the case is submitted, it can be decided whether these cases can be registered immediately or ifa manual review is needed first. These rules can be altered, or more rules can be added, if needed.
Foreign beneficial owners
When a beneficial owner is not a national, several issues arrise. First, the bulk of structured data that is present for Danish citizens disappears. We can no longer automatically verify if the beneficial owner is deceased or resides at the registered address.
The following information has to be submitted, when a foreign beneficial owner is registered:
Full name
Address
Citizenship
Passport number or identity card number
Picture of a valid passport or identity card
Details about the Beneficial Ownership
The validity of the submitted information depends (more than for Danish nationals) on the advisers and service providers who provide the information. It should be noted that in any case providing false information to the register is a criminal offence, which entails that the persons submitting the information can be held liable for supplying false beneficial owner information.
In order to verify the identity of foreign beneficial owners, the Danish Business Authority has introduced a series of checks that apply to foreign beneficial owners. First of all, the address is verified, by an international database, to ensure that the address exists. This does not ensure that the beneficial owner resides at the given address, but it does ensure that the address exist. Next, the Danish Business Authority sends the beneficial owner a letter to inform the person of their registration. If this letter is sent back to the Danish Business Authority, because the beneficial owner does not reside at the address or if the address turns out to be incorrect, the Danish Business Authority contacts the person that registered the beneficial owner and asks for a correct address and supporting documentation. Thus ensuring that the address is correct.
Next, the beneficial owner has to submit a picture of their passport or European identity card. The Danish Business Authority has developed a system that resembles those used in airports to scan the passport or identity card in order to ensure that the correct information is entered into the system. It also ensures, in some areas, that the passport has not been falsified.
Automatically verifying beneficial owner data is just the first stage in ensuring that the register displays the correct beneficial owners.It is well known that entities that have the goal of concealing their beneficial ownership often register an incorrect person as the beneficial owner. If the entity can provide a valid passport and all the necessary details about the individual, even the best verification system cannot detect whether this person is indeed the entity’s beneficial owner or a decoy.
Therefore, the Danish Business Authority also conducts manual checks to verify the information, and the Danish Business Authority can dissolve companies and entities that cannot properly provide the necessary documentation. This effort is well underway, and 17 entities have already been dissolved using this approach.
It is important to note that in order to make these cross-checks work in practice, a number of boxes must be checked. First of all, the Corporate Registry has to be fully digital, as well as the system used to file information with the Registry. Second, the other authorities that provide the data needed must also be digitalized, and have structured data as well, in order to make these checks work in real life. The Danish Business Authority has invested in a very modern IT-infrastructure that makes it possible for the beneficial owner register to conduct these checks.
The possibilities for cross-checking and verifying beneficial owner information are immense and can always be improved. The Danish Business Authority aspires to be in the forefront of the development of beneficial owner registers and look to other registers around the world to seek inspiration. We are closely monitoring the research and the increasing development in the sector.
Every country needs a financial centre, but as it grows beyond a certain optimal size (where it is carrying out the functions it is supposed to do) it starts to harm the country that hosts it. That is the finance curse, and many countries including the United States and United Kingdom passed that point decades ago. Shrinking the financial centres in these countries (in the right way) would make their citizens better off.
The finance curse is a compex phenomenon — see this explainer — but one of the commonest objections to it goes like this: “if oversized finance is so harmful, how come Switzerland and Luxembourg and Bermuda are so rich?”
At first glance, this question seems to be reinforced by an extensive new World Bank report, with the thrilling title “Purchasing Power Parities and the Size of World Economies.”
It noted that Luxembourg, a tax haven, had the world’s highest Gross Domestic Product (GDP) per capita, at $112,000 (on a Purchasing Power Parity basis, which is the most normally used measure of GDP,) with Ireland and Switzerland at a still-impressive $78,000 and $67,000 respectably. These tax haven scores are comfortably above those of other European countries: Denmark ($55,000), Finland ($47,000) France (45,000;) Germany (53,000;) Netherlands ($55,000;) Norway ($63,000,) Sweden ($53,000) and the United Kingdom ($46,000.)
Perhaps the headline from that comparison is that Luxembourg’s GDP per capita is twice that of Germany.
Case closed? Not so fast.
The Financial Times is also looking at this report, under a headline “Why the world’s richest countries are not all rich.” And it explains what most economists know: GDP is a pretty poor measure of the prosperity of a country’s citizens. In this case, that’s because GDP includes corporate profits — and when you’re a tax haven, those profits hardly touch the sides. They are measured in the data, but hardly contribute at all to citizens’ wellbeing (and as the finance curse explains, they often detract from it.)
This table from the World Bank report highlights the problem:
The light blue bar shows GDP per capita, making the tax havens look great; the smaller dark bars show AIC (Actual Individual Consumption per capita) where Switzerland, Luxembourg and Ireland look rather pedestrian. The finance curse disappears. (Bermuda’s AIC is pretty high – but we’ve been looking at Bermuda recently and its tiny population — the section that hasn’t already fled economic distress — is severely divided with a large share suffering severe hardship, and the main winners being white expatriates.)
Luxembourg’s Actual Income Per Capita is $38,000, somewhat higher than Germany’s $34,000, but not crazily so. Switzerland’s is $35,000, while Ireland’s is $27,000. The other rich countries — Denmark, Finland, France, Netherlands, Norway, Sweden, the United Kingdom — all have AICs from $31-36,000.
Not only that, but there is a range of other reasons, nothing to do with tax havenry, which boost ehe genuine incomes per capita of the havens. Over two thirds of the economically active population of Luxembourg, for instance, are foreigners, many commuting in on an daily basis: so other countries pay for these people’s education and retirement, and Luxembourg takes the cream of their productive working lives. Ireland — well, Ireland’s “Celtic Tiger” economy is not only not what it seems (once you change GDP into more appropriate measures like Gross National Income) but the widely peddled story that corporate tax cuts made Ireland a myth is a hoax. The ingredients of success were elsewhere entirely (look at this, if you don’t believe us.)
What is more, countries dominated by large offshore financial sectors tend to have economic policy captured by financial interests, which tends to create regressive policy (tax cuts for the rich, anyone?) which worsen inequality: neither GDP nor AIC per capita capture these nuances.
In short, debasing your economy, relaxing tax laws and financial regulations to attract the world’s hot money, is no recipe for national prosperity.
Don’t believe the hype. Don’t fall for the finance curse.
Dans cette vingtième édition de votre podcast Impôts et Justice Sociale, nous revenons sur la transparence des contrats en Afrique centrale. La branche locale de l’ONG Publiez ce que Vous Payez a produit un rapport à cet effet, et son responsable a accepté de discuter des résultats avec nous. Aussi, le mois de septembre a consacré une fois de plus la campagne « faire Payer les gros pollueurs ». Le Centre Africain de Plaidoyer, une ONG basé à Yaoundé au Cameroun, a accepté de discuter avec nous à cet effet. Enfin, la Commission des Nations Unies pour le Commerce et le Développement (CNUCED) a publié son rapport sur le développement de l’Afrique qui révèle que le continent a perdu 89 milliards $ en moyenne chaque année, entre 2013 et 2015. Un des contributeurs au document a accepté de répondre à nos questions.
Ont participé à ce podcast:
Eric Bisil, Coordonateur pour l’Afrique Centrale et Madagascar de l’ONG Publish What You Pays
Komi Tsowou, Economiste, Division de l’Afrique, des pays les moins avancés et des programmes spéciaux Conférence des Nations Unies sur le commerce et le développement
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Cancel Public Debt, Build Just Tax Systems and End Financial Support for Fossil Fuels in Response to Multiple Crises.
In solidarity with our fellow activists and advocates in the Asian People’s Movement on Debt and Development (APMDD) we post here their press release regarding the open letter they have delivered to the UN General Assembly.
October 1, 2020
As world leaders wind up the historic 75th session of the United Nations General Assembly today, people’s movements across Asia and global civil society organizations called on governments to tackle debt, tax avoidance and evasion, and public financing of fossil fuels in response to the present multiple crises.
In an open letter to the UN General Assembly, the Asian People’s Movement on Debt and Development (APMDD) and 51 member organizations raised “three urgent calls” to help peoples and communities in Asia to survive the multiple challenges of coronavirus, economic recession, and accelerating climate change:
First, unconditional cancellation of public debt for all countries in need starting immediately with a cancelation of a minimum of four years of debt service.
Second, an end to public financing of fossil fuels and adequate, additional, public and non-debt creating Climate Finance.
Third, tax and fiscal justice to correct economic and gender inequalities and generate sufficient public revenue for social services spending.
According to Lidy Nacpil, coordinator of APMDD, the open letter seeks to raise the voices of communities from Asia, a region that is home to more than two-thirds of humanity that is now facing unprecedented suffering brought about by the multiple crises. “We want to convey these concerns with the expectation that the United Nations will hear and act on these concerns decisively,” said Nacpil.
Immediate cancellation of public debt
The open letter calls for decisive steps to comprehensively address unsustainable and illegitimate debt nationally and internationally, including a UN mechanism that is transparent, fair and not dominated by lenders, as well as international fiscal measures that are not in the form of loans, noting that the “debt relief” being offered is dwarfed by the volume of COVID19 loans being extended to countries in need.
“With the volume of COVID19 loans being extended to countries, we are concerned that it is creating greater public debt. The response to this pandemic should be reducing the debt burden. Precisely it is the decades of debt payments and debt-related austerity measures that have rendered the public health care systems of developing countries too weak to deal with the pandemic,” said Nacpil.
End public financing of fossil fuels
The open letter likewise calls for “just transition to clean, renewable and democratic energy systems that give primacy to the needs of people and communities,” noting that people of Asia are under various conditions of vulnerability and face a wide range of climate hazards.
“We echo the statement of UN Secretary-General António Guterres in the beginning of this pandemic that we need to turn the recovery into a real opportunity to devise a blueprint for a healthier planet to ensure a more resilient future. An immediate step that must be taken is to halt the use of public funds to support fossil fuel build out,” said Nacpil.
The open letter states: “The delivery of adequate, additional, public and non-debt creating Climate Finance for mitigation, adaptation and loss and damage is as urgent as public financing of measures to fight COVID19, economic assistance for those whose jobs, livelihoods and well being are most affected, and programs for building more just, equitable, resilient and sustainable economies that are the foundations towards solving the multiple crises.”
Tax and fiscal justice, domestic resource mobilization
Lastly, the open letter states that the multiple crises also underscore the urgency of making taxes more progressive in order to generate sufficient public revenue for social services spending, as well as end gender bias, the preferential treatment for multinational corporations and elites, tax avoidance and evasion, and illicit financial flows from the South to the North.
It states further: “We demand more decisive action from governments at a national level and as an international community most especially at this time when we can ill-afford the continuation of undermining public revenues. Furthermore, tax justice and addressing illicit financial flows have positive impacts on governments’ propensity for relying on heavy public borrowing. At the same time, we emphasize that tax justice must be accompanied by government budgets and spending programs that give primacy to the immediate needs of people and communities in the face of the multiple crises, providing essential services, fulfilling human rights and social justice, and addressing inequality.
“Developing countries are in need of more tax revenues now. There must be a halt to the unmitigated plunder of natural resources and the massive net outflow of wealth from the South to the North. We say enough to the domination of our economies by multinational corporations. We say no more to unfair trade relations, the exploitation of our workers as cheap labor domestically and overseas, and the payment of interests on unsustainable and illegitimate debt,” said Nacpil.
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